Primary volumes are likely to slow in the US high-grade bond market next week as borrowers await a widely expected rate hike from the Federal Reserve on Wednesday.
Bankers anticipate up to US$30bn of new issuance - a welcome drop from this week’s US$44bn supply surge that led to some investor indigestion and wider spreads.
“With the Fed in the middle (of the week), supply should be skewed to Monday and Tuesday, so hopefully (spreads) will get a little bit better,” said a syndicate banker.
Corporates are expected to dominate supply next week after a busy few days for Yankee financials, although more UK and Scandinavian banks could also hit the market.
With new issue concessions having shrunk to next to nothing, bonds began to widen after pricing on Wednesday and Thursday as yields on the 10-year US Treasury started to hug the 2.60% mark.
McDonald’s was trading 5bp-8bp wider than reoffer by Friday, according to MarketAxess, while Harley-Davidson was 5bp wider and Siemens flat to 3bp wider.
Demand has continued to be strong in primary deals, however, with no respite from strong inflows.
The asset class saw US$3.5bn enter bond funds during the week ended March 8, according to Lipper, bringing year-to-date net inflows to nearly US$30bn.
“Inflows into IG have been at a torrid pace, and new issuance gives investors a chance to get liquidity,” said Raman Srivastava, deputy chief investment officer at Standish Mellon.
“So when the new issue concession goes away or gets reduced it’s easier for bonds to underperform.”
Yet with just two new deals in the market Friday - a three-parter from John Deere and a subordinated note from Cullen/Frost Banker Inc, intra-day spreads were slightly improved on Friday.
Broader markets were also upbeat as investors cheered stronger than expected jobs data.
The US added 235,000 jobs in February, beating forecasts of 200,000, while the jobless rate dropped to 4.7% from 4.8%.
The CDX IG27 index was 0.93bp tighter at 63.25bp, according to Tradeweb, while the S&P 500 index was up 7.5 points at 2,372.